Founders and buyers routinely treat a signed Letter of Intent as a milestone worth celebrating. The document feels like a deal. It has signatures, deal economics, a closing timeline. What it mostly contains, structurally, is a set of aspirations with a handful of binding carve-outs buried in the boilerplate that both parties frequently underread.

The Binding Island Inside a Non-Binding Document

The standard LOI construction works on a split architecture. The commercial terms, purchase price, structure, working capital targets, earn-out mechanics, are explicitly non-binding. Courts have consistently upheld this. What remains binding, regardless of what the rest of the document says, is a discrete set of operational clauses that the parties need to function during exclusivity.

• Exclusivity (no-shop): The seller is contractually barred from soliciting or entertaining competing offers for the defined period, typically 45 to 90 days. Breach of this clause is actionable. Acquirers have recovered damages where sellers violated it while running a parallel process.
• Confidentiality: Either incorporated by reference from a prior NDA or restated in the LOI itself. The binding status of this clause survives a deal collapse.
• Expense allocation: Some LOIs include a specific provision governing who bears transaction costs if the deal breaks. These are binding when present and drafted clearly.
• Governing law and dispute resolution: Binding and operational from the moment of signature.

Everything surrounding these clauses, the price, the reps and warranties framework, the closing conditions, exists as a statement of intent. It signals alignment and informs the definitive agreement drafting process. It does not obligate either party to close.

Where Parties Create Unintended Exposure

The practical liability risk is not in mistaking an LOI for a binding contract on commercial terms. Sophisticated parties generally understand that distinction. The risk is in the conduct that follows signing. Under a doctrine known as implied covenant of good faith, courts in several jurisdictions have found that parties who sign an agreement to negotiate, even a non-binding one, may owe a duty to negotiate in good faith toward a definitive agreement. The bar for proving bad faith is high, but the exposure is real when one party can demonstrate the other never intended to close and used exclusivity purely to foreclose competing processes.

A second exposure point is specificity. LOIs that spell out key economic terms in granular detail, exact price, exact structure, exact treatment of a specific liability, create a stronger evidentiary foundation for a promissory estoppel argument if one party relies materially on those terms and the other walks away arbitrarily. Vague LOIs are, counterintuitively, sometimes less legally dangerous than precise ones.

The Definitive Agreement as the Actual Document

The Purchase and Sale Agreement or Merger Agreement is where commercial terms acquire legal force. Representations and warranties, indemnification baskets and caps, material adverse change definitions, closing conditions, and post-closing adjustment mechanisms all live here. An LOI that is inconsistent with the definitive agreement is generally superseded by it, provided the definitive agreement contains a standard integration clause. What gets negotiated in the LOI is therefore best understood as a negotiating posture, not a legally protected position.

The Operator Read

The structural observation worth carrying into any deal process is this: the exclusivity window is the moment of highest leverage for the seller and highest exposure for the buyer. A buyer who moves slowly through diligence during that window burns through it with no recourse. A seller who treats the no-shop as a soft obligation rather than a hard contractual bar invites litigation. The LOI is not where deals are made. It is where the conditions for making the deal are set, and two or three of those conditions have teeth from the moment ink dries.